Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Patient and steadfast uranium investors were given an early Christmas present last week when the Japanese community of Satsumasendai announced approval of the restart of the Sendai nuclear power-plant, the first restart to be approved in Japan since the 2011 Fukushima disaster.
In addition, an unusual amount of demand entered the spot market leading up to the announcement of the Japanese reactor restarts.
The spot market for uranium is murky and it’s hard to tell with any great certainty who the buyers are, but analysts believe that utilities buying could light a fire in the spot market.
The spot price of uranium has been weak ever since the Fukushima disaster in 2011 as future demand for U3O8 remained in question. Mine supply has been more or less stagnant and underfeeding has created a glut.
As a result of the increased demand in the spot market, last week saw the largest percentage gain in the spot price week-over-week since 1996 (according to TradeTech). The spot price closed yesterday at $41.75 per pound; a gain of $5.50 per pound or + 15% week-over-week.
Although the restart of one of Japan’s 48 plants doesn’t move the needle on its own, it does end speculation (for the time being anyway) as to whether Japan will ever restart their nuclear power industry.
Uranium bears have been speculating that Japanese utility companies would dump their + 100 million pounds of uranium inventories into the spot market if the Japanese authorities continued to delay restarts of the power-plants.
As with any natural resource company, the price of the underlying commodity is typically the single largest value driver. This is most true for producers who depend on the price for revenues and cash flows.
In the uranium sector, most miners sell their uranium production under long-term contracts to utility companies around the world. These are 10 to 20 year contracts with fixed prices for the delivery of a certain number of pounds of uranium.
For exploration stories, the U3O8 price is less meaningful as the probability of future cash flows is more uncertain, so the discounted value of the future cash flows is less applicable. That being said, a rising spot price for uranium, while not material to the daily operations of a uranium explorer, does bring investor’s attention back to the space. This has already translated into inflated stock prices.
The explorers, who are typically most leveraged to the commodity price, have been some of the biggest beneficiaries along with almost every uranium stock in the market.
Uranium Participation, which is essentially a uranium ETF and holds physical uranium oxide concentrate and or uranium hexafluoride, is up only 8% since Thursday.
Cameco, which produces nearly 15% of the global supply of uranium, has tracked fairly closely with the spot price and is up 14% since Thursday.
The explorers/developers are also up as follows:
NexGen has the most exciting new high-grade uranium discovery in the world with the Arrow zone. It is located on the southwest edge of the Athabasca Basin in Saskatchewan.
Late in their summer 2014 drilling season, NexGen drilled hole AR-14-30 which proved to be one of the best holes ever drilled in the Athabasca Basin, intersecting 7.54% U3O8 over 63.50 metres, including 10.32% U3O8 over 46 metres and hitting as high as 66.80% over half a metre. The company just closed an $11.5 million bought deal financing which will see them fully-funded for a large winter drill program starting in January 2015.
Canaccord Genuity recently added NexGen to their 2015 Exploration Watch List and it is the only uranium story on the list.
By: Travis McPherson
Related: Uranium miners soar as Japan moves to restart nuclear reactors (Globe and Mail)
Related: Japan Nuclear Reactors Approved For Restart (The Wall Street Journal)
Also: NexGen drills spectacular 46 metres of 10.32% U3O8
Disclosure: Author is long NexGen Energy Ltd. and is a client. The company had no influence on this story. All facts are to be verified by the reader. Always do your own due diligence as this is not investment advice.
